The hidden cost of your unpaid interns

Joe Brennan
Joe Brennan is an associate in the Cleveland office of Fisher & Phillips, in all areas of labor and employment law.

As summer approaches, many organizations are preparing to hire summer interns. And while internships are typically viewed as a way for college students to gain experience and companies to benefit from their assistance, many questions focused on compensation and harassment arise surrounding their hiring. Let's take a look at the issues that may arise.Interns and the Fair Labor Standards ActThe primary issue employers face with respect to interns is whether an intern is entitled to either minimum wage or even overtime compensation. The Fair Labor Standards Act (FLSA), the federal law governing overtime and minimum wage, rules apply only to “employees” but, unfortunately, the FLSA's definitions are vague in determining whether “interns” are, in fact, employees. The Act simply defines an “employee” as “any individual employed by an employer.”Due to this ambiguity, the Department of Labor (DOL) has interpreted the language of the FLSA to carve out a six-factor test for determining when interns must be paid federal minimum wage and overtime: 1. The internship, even though it includes actual operation of the facilities of the employer, is similar to training that would be given in an education environment; 2. The internship and training is for the benefit of the intern; 3. The intern does not displace regular employees, but works under close supervision of existing staff; 4. The employer that provides the training is for the benefit of the intern; 5. The intern is not necessarily entitled to a job at the conclusion of the internship; and

6. The employer and the intern understand that the intern is not entitled to wages for the time spent in the internship.All six factors must be met for the intern to be exempt from the FLSA's requirements.Notably, the Sixth Circuit Court, which covers Ohio, does not adhere to the DOL's test. Instead it states that “the proper approach for determining whether an employment relationship exists in the context of a training or learning situation is to ascertain which party derives the primary benefit from the relationship.” This means if the company derives the greater benefit vis-à-vis the value of the “work” performed by the intern, then its more likely the intern is actually an “employee.” On the other hand, if the intern obtains the greater benefit vis-à-vis the value of the learning/training provided by the company, the more likely he or she is not an “employee.”Interns and Federal Employment LawsA lesser, but nevertheless important, consideration regarding a company's use of interns, is whether interns are entitled to the protections of the federal anti-discrimination statutes, including Title VII (prohibiting race, gender, religious, color discrimination), the Age Discrimination in Employment Act, and the Americans with Disabilities Act. Generally speaking, courts, in determining whether employment laws protect interns, focus on whether or not an intern derives a significant economic benefit from the company. The Sixth Circuit court, which governs Ohio, states that a 13-factor employee test should be used for determining “employee” status under the federal employment laws. Yet, the first factor, the putative employer's right to control the manner and means by which the product is accomplished, is tended to be viewed be the most important.The Potential ConsequencesEmployers who are found to have violated the FLSA by failing to pay an employee must generally pay all wages owed (including time and one half for overtime) for the past three years plus 100% of the wages owed as an additional penalty. In addition, the employer can be required to pay the plaintiff's attorney's fees.Furthermore, if the intern is subject to federal employment laws, which looks more and more likely, employers can face liability for harassment or discrimination claims.

How Can Employer's Protect Themselves?At a minimum, organizations should review their internship programs, or contact legal counsel to assist in developing an internship program, to ensure that interns are offered an educational and training experience. With regards to avoiding FLSA pitfalls, companies should consider the following tips: • Have a written and signed understanding that the internship is unpaid • Prepare specific written goals, focusing on training and experience for the intern • Rotate interns through different departments and tasks • Avoid long periods of independent work performed by an intern • Do not bring on interns in lieu of hiring employees • Require the intern to complete a weekly worksheet indicating what training and education has been achieved • Ensure that interns are working under close supervision of one or more supervisorsTo minimize potential employment law issues – particularly for jurisdictions in the Sixth Circuit – companies should be mindful to treat all interns with the same respect, fairness and equality afforded to all employees. Providing these interns with a modified “handbook” that includes basic equal employment and harassment reporting procedures is critical in limited potential liability. Affording everyone the same quality treatment, regardless of whether they are or are not on payroll, is the best way to avoid the unexpected harassment or discrimination lawsuit.

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